Though one can file a petition for relief under a number of chapters in the Bankruptcy Code, consumers most commonly file for liquidation under Chapter 7, which involves a court-appointed trustee collecting nonexempt assets from the petitioner or debtor in order to pay its creditors. Generally a trustee can in deed claim a security deposit in a bankruptcy, albeit with certain limitations.
A landlord, for example, may contest the courts for a tenant’s security deposit in order to cover unpaid rent or damages to the property as outlined in their lease. Therefore a trustee may not automatically compel a landlord to turn over or reimburse a security deposit to the bankruptcy estate. Similarly, a tenant may seek to be reimbursed for her security deposit in the event that their landlord has filed for bankruptcy.
Given a landlord’s interest in a security deposit, courts often rule in their favor as a trustee’s claim is limited to property that is incontestably property of the bankruptcy estate. Conversely, a tenant may find recovering their security deposit more trouble than it’s worth as security deposits are dischargeable debt, which means that a landlord is not responsible for returning the security deposit once the bankruptcy petition’s been filed. Assuming estate assets exist, a tenant would be refunded by the trustee through the bankruptcy process. Unfortunately, many estates lack the assets to refund creditors, including a tenant’s security deposit.
Bankruptcies can be a complex, drawn-out, intimidating process for everyone involved; however, whether you are a tenant or a landlord, the best way to protect your interests is to be proactive and stay informed! For more facts on bankruptcy proceedings consult with your attorney. Stephen K. Hachey, a Florida real estate attorney can help your wade through this difficult process and determine a positive solution. Contact him at 813-549-0096.
The opinions in this post are solely those of the author. The author takes full responsibility for the content. Like all blog posts, this is offered for general information purposes and does not constitute legal advice.